Levi’s In China u Major Issues –Economic, competitive –Ethical, moral –Reputational

Levi’s Ethical Values u Compassion u Promise-keeping u Honesty u Fairness u Respect for others u Integrity How do these relate to Levi’s strategy and entry choices??

Attractiveness of China Pros u Large potential market u Cheap labor u High quality labor Cons u Lack of infrastructure u Restrictions on imports and currency u Intrusive government u Actual market only fraction of potential u Underdeveloped legal system u Lack of civil/human rights

Social Influence on Strategy and Entry Levi Strauss HQ in U.S. WOS in Europe JV in Honduras Contract Suppliers in China

Social Drivers of Entry Mode Decision u Mindset u Country-market opportunity/cost analysis –Stand-alone Attractiveness –Strategic Importance u Resources-Control-Risk tradeoff

Levi’s Options for Entry and Strategy u Withdraw and postpone further involvement u Remain and expand presence u Intermediate option: –level of engagement linked with “progress”on an issue by issue basis (i.e., “constructive engagement”) –active coordination among other industry players –transmit values via JV partners other than SOEs What are economic and ethical consequences of each?

China Policy Group’s Recommendation u Ranking countries according to “pervasive” human rights violations u CPC Recommendations/Voting: –5-year phase out, stop FDI (2 members) –Constructive engagement (10 members) with: »more monitoring of all existing relationships, »no relationships with SOEs »no new relationships that jeopardized corporate reputation

Levi’s Actual Decision u CPC and EMC both split on what to do u CEO Haas asserted his values in tie- breaker: –“because of pervasive violations of human rights, Levi’s will defer future FDI and begin a three-year withdrawal from all sourcing relationships with contractors in China.”

Implementation of Decision u Cease all relationships with SOEs u Cease search for new contractors u Develop production contracts in Hong Kong, Philippines, and Indonesia commensurate with pace of orderly withdrawal

Your Reactions What do YOU think of this decision? What do YOU think about the decision process?

Others’ Reactions u Levi’s Sr. Mgr.: “I just came back from China and am pleasantly surprised by this decision.” u Levis’ Jr. Mgr.: “I’m impressed by Levi’s willingness to put so much effort into this decision. Only history will tell us if it’s the right one.” u Levi’s Hong Kong Mgr.: “The cost of developing new production capabilities will not be a trivial one.” u Nike Mgr.: “I can’t figure out what Levi’s is doing... everyone else is moving forward in China.”

u Am. C of C in HK: “This is just an isolated incident... that will have little impact on what other companies do in China.” u Mickey Cantor: “We applaud Levi’s and encourage other U.S. companies to be leaders in protecting workers rights wherever they operate.” u Chinese Govt.: “Tens of thousands of companies will invest in China. They’re all quite free to move in and out... they don’t need to make excuses.” u Ad Exec.: “It strengthens the brand... one that thinks for itself.” Others’ Reactions

Advantages to Ethical Guidelines u To ensure consistency between Levi’s values and practices u To protect Levi’s brand image (against “vigilante customers” -- those interested in the company’s behavior as well as its products) u To avoid penalties for breaking extraterritorial application of U.S. employment laws

u Difficult to apply and monitor u How far up supply chain should they go? u Too rigid, may be applied universally to situations warranting further engagement u Levi’s going beyond its responsibility -- downside of “moral imperialism” u Withdrawal now may make engagement later more difficult u Chinese government espouses “take-it-or-leave-it” attitude. Disadvantages to Ethical Guidelines